Savings accounts for children

Savings accounts for children. Many parents are looking for these financial products for their child’s future. What are the best savings accounts for children?

You have a child. You’re wondering because, from now on, meeting his needs is your responsibility. A child, until the age of 18, is financially dependent on you (because being physically and emotionally dependent on you is a shorter period).

That’s why financial institutions come up with savings accounts for children.

Financial dependence can be even greater than the age of 18. It depends on you how much. There are children who are supported by their parents until the age of 30 or even 40, and their children, too.

You, as a parent, want to support your child in terms of paying school fees, and here I mean university fees (especially if they are abroad), buying their own home, starting a business, why not, or anything else that can represent a good start in life.

Time and money

From birth, the child has needs that you, their parent, satisfy, and they are a little expensive. As they get older, their needs increase, and so do their expenses. The biggest expense is the school fee for higher education. Most parents want to be prepared with the amount necessary to support their child in their studies, especially abroad. It is necessary to prepare in advance for the situation in which the child ends up studying abroad, otherwise you end up telling him that you do not have the necessary money and finding excuses, reasons; justifying yourself to him that you cannot support him financially.

To end up collecting that amount of 4 zeros, and in a currency like the euro, it is necessary to start saving early. You can save his allowance and additionally, depending on the family budget.

Capitalized interest

The effect of this concept called by Einstein: “the eighth wonder of the world” helps you multiply your money to be able to support your child with an amount much greater than the amount you can collect over time.

This capitalized interest is like a snowmobile: you make the snowmobile by collecting the snow around you and you let it go downhill, on a track. It will accumulate snow and grow. The larger the track, the bigger the snowmobile will become.

We find this concept in loans. Because of this capitalized interest, we end up paying double at the end of the 30 years. We borrow 50,000 euros and pay a total of 100,000 euros, because we pay: interest on interest.

When saving/investing, we receive interest on interest. We receive interest on the amount deposited plus interest on the interest previously received. That is why the interest, starting with the eighth year, exceeds the amount allocated annually. More information and calculations regarding the effect of capitalized interest can be found here: https://laurentiumihai.ro/puterea-dobânzii-compuse/

This interest is found in savings and investment products. (Not all.) The larger the amount allocated and the higher the interest rate, the more you will get an amount that will help you effectively support your child’s future.

Savings accounts for children – solutions

To support your child’s expenses from the age of majority, there are several financial products that you can use. They are divided into savings products – where the percentage of interest received is small and investment products – where the interest received is clearly higher than the other category.

Saving methods

From the perspective of supporting children, financial institutions have come to the aid of parents. I will present the entire range of financial products aimed at financially supporting children’s future, categorizing them into: bank deposits and insurance.

What is important, and I emphasize this idea, is that: children’s products are part of the categories listed above. They have the characteristics of adult products, only the name suggests a savings product for children.

Bank deposit

 A bank deposit is an account where money is placed for a period of 1 month to 2 years. (There are also exceptions to the standard terms of 1 month, 3 months, 6, 9 and 12 months.)

Advantages: 

• Participation in the Guarantee Fund – safety of money (ceiling of 450,000 lei)
• Adjustment of money to inflation

Disadvantages:

• Simple interest (most of the time).
• Flexibility: great access to money. The risk of “entering that money when recurring expenses increase”
• Low interest rate: 1-3%

 

Study insurance

It is a life insurance – savings with or without capitalization (depending on the company). The amount deposited throughout the period (min 10 years and maximum child’s age of 18, up to 25 years) is the insured amount offered at the end of the contract, but also in the event of the parent’s death, regardless of the contribution paid by the parent.

 Advantages:

• The insured amount, both at the end of the contract period and along the way, at the time of death.
• Guaranteed interest between 1 and 2%/year plus (depending on the company) between 2 and 5%/year with capitalization.
• Security of money by participating in the Guarantee Fund – as a last safety net.
• Exemption from paying profit tax

Disadvantages:

• Inflexibility in withdrawals and deposits. You do not have access to money before the end of the contract period. Exceptions may exist, but you need to know, from the beginning, what those situations are.

Junior centenarian

It is a savings product to help parents financially support their child when they reach the age of majority.

The state offers a 600 lei bonus, and the minimum amount deposited by the parent is 1200 lei per year.

Advantages:

•  No profit/income tax
• 600 lei bonus offered by the state every year until the child turns 18
• If serious health problems arise, the money can be accessed

Disadvantages:

• 3% interest received is simple interest
• The state bonus is not interest-bearing

! It is advantageous for children over 9-10 years old, because the period is short, during which capitalization on other products does not take effect, and the bonus helps in this regard, and the money is not blocked for a long period.

 

Investment methods

Unit-linked insurance

A unit-linked life insurance is a financial product that combines the protection of life insurance with the benefits of an investment fund: high yield (2-12%), taking advantage of financial market opportunities and tax deductibility: no taxation of profit.

Advantages:

• Access to the investment market with small amounts of money.
• Access to both the domestic and foreign capital markets.
• Transparency: from the moment the insurance contract is concluded, information is visible on both the protection and investment sides: financial instruments and their percentages, with the possibility of changing them; transparency of costs.
• Flexibility: the possibility of choosing the investment, with complete investment structures (all degrees of risk). Also, flexibility in withdrawals and deposits (waiving the deposit while continuing to invest the amounts in the account, as well as reducing or increasing the investment), contractual changes: investment programs, investment frequency, additional clauses (attachment or termination), as well as extra investments.
• Dynamism: during the course of the insurance contract, depending on the movements occurring on the capital market, as well as the client’s investment options, the product offers the possibility of redirecting investments between programs for free.
• Participates in the Guarantee Fund, which provides investment security in the event of the company going bankrupt and also reinsurance of the company so that it does not reach the Guarantee Fund directly.
• Lack of profit tax (10%).
• Capitalization of profit through the existence of capitalized interest.

Disadvantages:

• Choosing an investment horizon of at least 15 years to provide a high level of profit, being able to achieve at least one financial objective (several objectives can be achieved, such as supporting your retirement).
• Choosing a company that practices high costs represents a disadvantage in registering a good profit.
• Does not benefit from dividend accumulation.
• Unscheduled withdrawals in market declines can result in losses.

Mutual fund

A mutual fund is a financial product in which money can be invested. It is a fund that buys financial instruments (bonds, government securities, shares) with the money deposited. Mutual fund yields are higher than those of financial deposits, and they are also determined by the instruments in which they are invested (shares bring the highest yields).

Advantages:

• Higher returns are obtained on the money saved.
• It is easy to open a fund – simple access.
• Small amounts are invested, even only 100 lei.
• The investment is made by the fund administrator/administrators – people who have knowledge in the investment field and are connected to the market.
• Flexibility in deposits and withdrawals.
• Diversification of the investment through the chosen financial instruments that include both stocks and bonds, government securities.

Disadvantages:

•  Does not participate in the Guarantee Fund.
•  There is no contractual period, which makes it completely flexible to determine the sale of units when the market is declining and losses are recorded.
• The profit is taxed at 10%.
• Administration costs, regardless of the results.
• The management of the fund depends on the knowledge of the administrator/administrators – the investment policy.

 

Real estate investment

Real estate investment involves having large capital to purchase a property to rent out. You also need time to manage the property in possible unforeseen situations that may arise during the rental and the availability to communicate with tenants. Real estate investment involves marking the profit from the appreciation of the property, following its subsequent sale, or from rental. Most investors in the real estate market choose to rent out their purchased properties, rather than sell them when the property appreciates.

Advantages:

•  Appreciation of the purchased property.
•  Obtaining passive income from rent.

Disadvantages:

•  Damage caused by tenants, which represents an extra investment and a depreciation of profit.
• The 75% rental rate that can vary depending on several aspects: tenants, the degree of accessibility of the area, extra investments in the property.
• Payment of profit tax.

We haven’t talked about investing directly in the capital market. You also have this option. Maybe we’ll address this topic in the future, in another article.

Savings accounts for children and extra protections

Health is very important. You, the child’s parent, need to be protected. There are protections in the event of accidents or common illnesses (a simple cold or pneumonia) to serious illnesses (e.g. cancer). These protections can be attached – clauses to life insurance products or can represent a product in itself. (It is necessary to compare which is cheaper). Health refers to medical checks or analyzes where we are talking about a product in itself. You benefit from these medical services at a private clinic.

A health insurance, unlike a medical subscription, includes several private clinics where you can choose to be treated.

If you have not had any analysis or check-up during a year, you do not get that money back. The same happens with insurance for serious illnesses, accidents, and disability. All payments made to cover the risks in question represent payments made for your psychological and financial peace of mind, at the same time.

You have the option, if you do not want to pay for such risks, to set aside your reserves: to put money aside and if you happen to have a health problem, to pay for medical services with the money you have saved. The risk regarding reserves is the lack of the necessary amount if the health problem is expensive.

Savings accounts for children – what should I choose?

All products are good if they are managed, over time, in the manner and for the purpose for which they were created. For example: we cannot expect an investment fund to offer us a guaranteed interest rate or a deposit to offer us a high interest rate.

The choice is made depending on the financial objective. Now, talking about your child’s studies, all these products are necessary to support him. For example: the deposit is used for short-term expenses: supplies, nursery/kindergarten/school fees.

If you want to go for a savings or investment option, you must analyze your financial situation, but also your interests and needs, at the same time: greater protection or higher yield, greater flexibility or not, etc. By putting all these characteristics together, you will find out what is the best financial solution for you in terms of child support.

What should I pay attention to?

• The amount of the premium

It is necessary to pay attention to the monthly amount that you allow yourself to allocate regardless of the period; regardless of whether it is December or August (months with high expenses: gifts, respectively vacation), but at least the child allowance, if you cannot save other money from your budget.

• Interest

Yes, it is necessary, because we are talking about an average period of time; while the money can be put to work for you, for your goal of supporting your child and, ideally, it should be a capitalized interest.

• Administration costs

Yes, commissions are important because you can end up with a higher or lower amount at the end of the contract, depending on the level of the commission applied throughout the entire period of its administration. That is why it is important to see what costs apply and to what: if they apply to the account balance or to the amount deposited. If you have a commission of 2% with one company and 5% with another, the two figures mean nothing. Mathematically 5 is greater than 2, but that does not mean that the one with the commission of 5 is a scam, because it can be a 2% commission applied to the account balance (deposited amount + amounts received from capitalized interest, so your cost is also capitalized) and 5% of the deposited amount (fixed, small amounts). Therefore, the product with 2% is more expensive than the one with 5%.

• Security

The security of the money is provided by participation in the Guarantee Fund and this specification is found in the contract. It is very important to have a consultant who explains the clauses in the contract to us and to understand the contractual terms. (You are not a finance specialist and you don’t have to be; you don’t have to go to school to make a financial product, and if you didn’t go to finance school, that doesn’t mean you shouldn’t make contracts and be reluctant.)

Good to know!

1. Everyone is a specialist in their field.
2. All financial products on the market are good if they are used for the purpose for which they were created and if they are managed as such.
3. Contracts can be made both in lei and in another currency. Usually, investing in another currency represents an investment on the foreign market.
4. Diversification is the key to success, both in investments and in savings/investment plans for medium and long-term goals.
5. Financial plans also require financial education that comes over time, financial discipline. Flexibility – access to money is not an advantage (most of the time) because you risk not having the money needed to support the child and that is why, I believe, that inflexibility leads to a higher profit. However, we must not forget about reserves for unforeseen situations and that is why you need good planning. I recommend that you do your financial planning together with an expert, because he can help you see the obstacles that may arise in your way, thus, you can include solutions that lead to their resolution, so that you do not end up in the position of not achieving what you set out to do. (The consultant has experience and can see what you do not see).
6. Once money is put into the economy, it does not devalue (especially if it is invested). Indexing with inflation is a recommendation that is up to you: to constantly allocate the same percentage of your income. For example: if you now allocate 5% of your income to this goal, keep allocating 5% of your income even when it increases.
7. The responsibility for his schooling, the start he has been given in life, is in your hands, now!
8. Good planning removes danger and leads to relaxation, peace and fulfillment.

Choose the best decision! Choose to talk to a financial consultant!

Choose to talk to a specialist and make a responsible decision for the future of your family. The knowledge and experience of a specialist: an independent financial consultant is put in your favor and the future of your child.

If you want to talk to an independent consultant and want to plan the financial support of your child, you can schedule a financial planning session in which, personalized, we will choose the right solutions. The planning session is free. https://www.e-learning.psihologiabanilor.ro/consultanta-financiara/

Success in becoming aware of money and the importance of planning your child’s future!